11 January 2012

The Problem with Anti-Globalization as Innovation Policy

Writing in The Washington Monthly, Michael Mandel of the Progressive Policy Institute has an essay on innovation and productivity provocatively titled "The Myth of American Productivity." Here I critique the argument in the article made by Mandel, specifically his argument that "supply chain innovation" is somehow a bad thing whereas what he calls "domestic innovation" is a good thing. I disagree.

First, here is Mandel's core argument in his own words, in which he argues that increasing agricultural productivity is fundamentally different than increasing productivity in manufacturing:

Consider, for a moment, what a farmer has to do to improve the yield of a corn or wheat field in Kansas or Nebraska. Machinery has to be purchased to plant and harvest the crops. Pesticides and herbicides have to be applied to fight bugs and weeds. Irrigation has to be used appropriately to make sure the crops mature as desired.

In a very real sense, agricultural productivity is intrinsically rooted in American soil. Yes, the tractor might be imported from Japan. But a farmer cannot plant crops in Iowa and then outsource the harvesting to Vietnam. Pesticides have to be sprayed on American bugs, and crops have to be irrigated with American water. Most of the value created by agriculture is made in America.

By contrast, most manufactured goods these days are the product of global supply chains, which may include multiple countries and border crossings. Your smartphone, for example, is assembled from components that were manufactured all over the world. On a less high-tech note, the cedar hangers that organically keep your suits and dresses free of pests may be made of wood grown in the U.S., shipped to China for manufacture, and then shipped back to the U.S. again.

Mandel argues that with respect to productivity gains, it is important to distinguish between "domestic productivity improvements" and "global supply chain management." Mandel argues that the former is to be preferred -- it is a more sophisticated way of saying "Buy American."

Imagine if you will a big factory building. Let's say that it has two big doors, one on the front market "Inputs" and one on the back market "Outputs." The company produces Widgets which are sold in the marketplace. Employees, raw materials, tools, machines, processes and techniques are brought in through the Inputs door, and Widgets emerge from the Outputs door.

Let's say that the factory employs 100 people. Consider a first case in which a newfangled machine in brought into the factory which increases efficiencies in the production of Widget components and lowers costs, meaning that the company can now produce the same amount of widgets with only 90 employees. This then would be an example of a productivity gain. Now consider a second case, in which a different machine is brought into the factory, with the key difference being that the new machine is actually a transporter device (a la Star Trek 1967) that can beam in from overseas Widget components and lowers costs, meaning that the company can now produce the same amount of widgets with only 90 employees. This too would be scored as a productivity gain.

Under Madel's argument the first machine would be preferred to the transporter, even though they both have exactly the same effect on productivity and number of jobs. However, the different technologies might have profound effects on the kind of jobs that the factory employs, and it is this effect which Mandel notes and disapproves of:

If companies reconfigure themselves to better scour the globe for the lowest-priced goods and services, then their essential personnel are multilingual business school graduates with the ability to parachute into Shanghai or Bangalore and negotiate the best deals with suppliers, logistics experts who can keep the goods flowing, marketers to sell the goods, and software engineers to program the computers that communicate with the suppliers. In other words, the bulk of the company’s own workers essentially perform a creative or coordinating function, rather than a manufacturing one.

One might wonder what is wrong with multilingual business school graduates, logistics experts, marketers and software engineers, especially if such jobs are higher paying than the low value manufacturing jobs that have been displaced. This is of course not a happy situation for those whose manufacturing jobs actually have been displaced, just as it was for farmers a century ago. Hence, in the context of growth in productivity it is essential that the workforce implications of the effects of such growth be addressed proactively. Efforts to freeze in place a particular economic configuration are certainly doomed as strategy.

Mandel actually hits on what really matters but quickly glosses over it:

Without innovation, a supply chain strategy fails over time.

Of course, without innovation a "domestic productivity improvement" strategy falls over also -- productivity improvements are actually the quantified definition of innovation! The focus thus should be on innovation and how to manage it -- both its positives and negatives -- rather than trying to protect certain American jobs from the consequences of innovation.

Mandel confuses "competitiveness" with "protectionism" and sees barriers to trade (or perhaps more accurately, incentives not to trade) as a key to improving American job prospects. The results of the policies that Mandel proposes might actually to make the American economy less competitive and less innovative.

The key to economic growth, jobs and competitiveness in the United States lies in enhancing productivity, where ever opportunities exist, while at the same time managing the consequences (which can be profound and negative for some) of success in that endeavor.